How to Compute Your REAL Hourly Wage

Like many Get Rich Slowly readers, I credit Your Money or Your Life with changing the way I approach my personal finances. This book transformed my relationship with money, and helped me to understand that by spending beyond my means, I was sacrificing a secure future for today’s passing pleasures.

One of the book’s key insights is that time really is money. Or, approaching it from the other direction, money is time. The authors write:

Money is something we choose to trade our life energy for. Our life energy is our allotment of time here on earth, the hours of precious life available to us. When we go to our jobs we are trading our life energy for money. This truth, while simple, is profound…

Our life energy is more real in our actual experience than money. You could even say money equals life energy. So, while money has no intrinsic reality, our life energy does — at least to us. It’s tangible, and it’s finite. Life energy is all we have.

I know this sounds a little hokey. In fact, when I first read Your Money or Your Life, I dismissed this section as New Age mysticism. That was a mistake. If you can look past the unfortunate terminology, there’s a lot of power to this concept. What Dominguez and Robin are actually saying is that time is money.

Your Money or Your Life uses this notion as the foundation to its philosophy of financial independence: time and money are intertwined, and the relationship between them frames all of our financial decisions. To illustrate, the authors encourage readers to calculate their real hourly wage.

Nominal hourly wage
We don’t earn as much as we think we do, write Dominguez and Robin. You may be paid $15 an hour, but your real hourly wage is less than that. Possibly much less.

Let’s say we have a friend named Joe and that he’s a plumber. Though Joe hopes to earn $250,000 a year eventually, he currently makes the national average for his profession, or about $48,000 a year for a 40-hour workweek. His nominal wage is approximately $24 per hour.

Based on these figures, if Joe the Plumber decides to buy an iPod nano ($150), he’s exchanging about six hours of his time for it. (6 hours worked x $24 per hour = $144 total wages, which is close enough.)

Hidden expenses
Think about your job. Think of all the things you do and the money you spend that you wouldn’t if you did not work. How long does it take to drive to work? How much does the gas cost? Does your job require that you own a suit or a uniform? Do you have to take vacations to cope with the stress in your career?

Your Money or Your Life lists eight such possible job expenses, including a few which might be applicable to Joe:

Commuting — Joe’s office is 20 miles from his home. Every day, he spends an hour commuting to and from work in his 2000 Ford Focus, which costs about 38 cents per mile to operate. His weekly commute costs 5 hours and $76 (38 cents times 200 miles).

Clothing — It doesn’t take Joe extra time to get dressed in the morning, but it does cost him a little extra money. Several times each year, he has to buy new work clothes because the old ones keep wearing out. Maybe he spends $300/year doing this.

Food — Joe might take a sack lunch if he were on his own, but he works with a partner who prefers fast food. Joe likes McDonald’s and Subway, too, so he’s happy to go along for the ride. Each day, Joe spends about $5 and one hour for lunch.

Though Your Money or Your Life lists several other ways in which work can cost you money, these are Joe’s only expenses. His job costs him about 10 hours per week (or 500 hours per year) and about $107. We’ll round it down to $100 per week, so that’s about $5000 each year.

Real hourly wage
Once he’s estimated the extra time and money he spends on the job, Joe can compute his real hourly wage. The equation is actually very simple:

First, Joe subtracts his work-related expenses from his annual salary to find his actual earnings.

Next, he divides his actual earnings by the total number of hours he spends each year on work-related tasks (including business trips and Christmas parties, etc.).

This simple equation produces Joe’s real hourly wage.

Using our earlier figures, Joe the Plumber’s actual salary would be $43,000 per year ($48,000 base minus $5000 for commuting, clothing, and food). Joe leaves the house at 6:30 in the morning, and does not return until 4:30 in the afternoon, which means he’s devoting 50 hours per week — or about 2500 hours per year — to his job.

Joe is spending about 2500 hours per year to earn $43,000. His real hourly wage is $17.20. Not bad, but still much lower than the $24 per hour he thinks he’s earning.

Knowledge is power
Why does your real hourly wage matter? Remember that time is money — literally. When he’s making $48,000 a year, it only takes Joe six hours to earn enough for an iPod. That’s less than a day’s work. But based on his real hourly wage, it would take Joe nearly nine hours to earn the same amount. To earn the money for anything he wants to purchase, Joe has to spend 40% more time working than he thinks he does.

Computing your real hourly wage allows you to see how much you’re really getting paid, which can change your perspective. When I first did this in 2004, it had an immediate effect.

At that time, I was spending a lot of money on comic books. After I calculated my real hourly wage and applied the number to my expenses, I was able to see how much time each book was costing me. Was it really worth three hours to buy a collection of Aquaman stories I’d probably never read? For me, the answer was “no”, and I began to reduce my spending.

This “real hourly wage” is also a great tool for comparing prospective jobs, especially when there are a lot of variables. All things being equal, a job with a higher real hourly wage is better.

Now that I’ve spent several hours of my life energy explaining this concept, later today I’ll describe an even better way to look at spending decisions, one that takes into account taxes and living expenses.

Note: If Joe really did earn $250,000 a year, and all our other assumptions remained the same, the iPod would only cost him an hour-and-a-half of his life energy.

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All of the money Joe spends on his car, clothes, and food is probably post-tax money. You’d have to factor in Joe’s total tax rate on his income and factor that into the equation. It would probably be closer to $7,000 per year.

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Ross Brooks

I know this is a very old post now but I just wanted to say thanks as it saved me digging through the book again to find this particular piece of information.

Working out my actual hourly wage for my new job when I move to China was great, especially as even though I’m working significantly less hours, my actual hourly wage is higher than my current job.

Time is more valuable than money any day in my books.

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Greg

I love this post. I think it points out some opportunities in our lives to eliminate waste and take full advantage of our daily routine. I work 40 hours each week and have about a 5 mile commute each way. Unfortunately, since graduating college, I have lost the energy/dedication to go to the gym each week. With the desire to change my financial and physical situation I sold my truck and bike to work each day. Though I live through the volatile weather of Kansas (highs above 100 and lows below 0) I have had little trouble biking to work each day. The first benefit to this is that I am able to save myself $500 a month ( a $300 car payment, $100 in gas, and $100 in insurance). More importantly I have already lost 12lbs and fallen in love again with my two-wheeled companion. The ride to and from work each day gives me about an hour of exercise (30 min each way) and also an hour to let the ride relieve me stress. It has been the most frugal and eye-opening experiences of my life. Lastly I feel like a more environmentally conscious citizen. To relate this back to the real hourly wage post, I have been able to definitely increased my real hourly wage. Now if only I can break my bike accessories addiction. At least they cost me less hours of work.

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Nick Bradley

Great Post! However, you’re forgetting some other factors.

A major factor when considering real wages is the cost of a home in the suburbs/exurbs vs. a home near your job.

Let’s take a look at the San Francisco Bay Area, where housing prices increase as you approach the major job centers (San Francisco, San Jose, Walnut Creek, and Pleasanton).

On average, a home in Walnut Creek would cost twice as much as the same home in brentwood, a nice community in East Contra Costa County.

Factors:

1. It takes an hour to commute each way (520 hours a year)

2. The worker is makes $100,000 a year and works 40 hours a week (2,080 hours per yr.)

3. He is debating whether to buy a $200,000 condo in Brentwood or a $400,000 condo in Walnut Creek. The $200,000 condo would cost him $1,500 a month, while the $400,000 condo would cost him $3,000 a month

4. Without factoring in housing costs, the workers has a real wage of $38.46 if he lives in Brentwood vs. $48.07 an hour living in WC.

5. If you factor in after-housing wages, the worker makes $31.53 an hour in Brentwood and $30.76 an hour in WC.

6. If you factor in taxes, the equation changes even more. Assume the worker pays a 25% tax rate in Brentwood and 20% in WC (a bigger mortgage deduction).

7. The after-home, after tax real wage of the worker in Brentwood is $21.92 an hour while in WC it is $21.15 an hour; fuel would cost the worker if he lived in Brentwood about $1.15 an hour. So, $20.77 an hour in Brentwood vs. $21.15 in WC.

After looking at the data, it is a no-brainer to move closer in to a higher cost of living area after factoring in quality of life issues as well: 2 extra hours a day w/ the family.

“Was it really worth three hours to buy a collection of Aquaman stories I’d probably never read?”

I think we all know the answer to this.

(yes)

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Lisa Miller

I wholeheartedly subscribe to this method of calculating the worth of an essential or non-essential expenditure. I clean other people’s houses. Whenever I’m contemplating making a purchase and the least bit on-the-fence about it, I ask myself, “How many toilets is that?”. This makes saving a lot easier.

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Kristen at The Frugal Girl

I really should read that book…I keep hearing such wonderful things about it.

On topic, I think things like real hourly wage are a good thing to keep in mind regarding frugality. People tend to think it’s better to earn more than to spend time doing frugal things because they overestimate their true hourly wage.

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Ariella

I think this is a terrific post and everyone should know their “real” hourly wage, as opposed to the one they think they’re making. That said, I think it’s important to emphasize caution when making decisions based on the “hourly wage.”

An example: I am an attorney in the midwest and I make $52k/year salary, with the possibility of a bonus. Leaving that aside, I also teach Legal Research and Writing at the local law school, for which I am paid $8k from October through June. I teach two hours per week during that period (excluding holiday breaks).

But the real costs are much, much higher because of the amount of time it takes to prepare for class, grade the papers and meet with students to discuss their writing. Assuming that I spend 10-12 hours per week either prepping for class, marking papers or teaching, let’s calculate my hourly wage (I’m leaving out cost of commute, etc, because it’s near my firm and I almost always walk).

25 weeks @ 12 hours per week = 300 hours. $8k/300 = $26 per hour. Not too shabby, right? Right. Except! I take away time from my “real” job to teach at the local law school. I make much, much more per hour at my real job than I do teaching (considering my bonus, which I know will be around $32,000).

What I’m trying to get at — and which may not be coming through clearly — is that there are times when the “real” hourly wage isn’t a good indicator of the amount of passion someone puts into their job. Even though teaching takes up a significant amount of my time, I love it. It’s very enriching, I enjoy working with the students and I like to think I’m making a difference with them. If someone just looks at the finances of the situation, without considering other things like fulfillment, then they may only be getting part of the picture.

That’s why, although I completely agree that everyone should know their “real” hourly wage, I believe it’s very important to emphasize that the money isn’t the ONLY thing that’s important in terms of work.

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Charlotte

JD,

You did not count taxes which is the biggest reason why the IPOD actually costs him more hours of work. I also agree that to be fair, the benefits of work such as health insurance, 401K etc should be counted.

-Charlotte

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Greg

@ Jonathan E

In a Robert Fulghum book, I recall reading that the French have a word for this, it translates as simply “The Hat.” And he says that it is traditionally understood that the time one spends on small personal tasks and thoughts at work tends to be balanced by the time one spends on tasks and thoughts about work while at home.
My personal experience usually bears this out, whenever I work at anything that involves problem-solving, I’m trying to think of solutions all the time.

@ easy

Good points man. a lot of books about personal finance and time management seem to come at work from the perspective that its something you wouldn’t care to do at all except for the money you get from it. There are a lot of people though, who have chosen not to seek education, credentials or experience in those dull jobs, and instead go for something they enjoy doing, and thinking about even during their free time.

There are many worthwhile skills that you almost cannot hope to master unless your rent check depends on being able to employ them.

Of course not everyone gets the same satisfaction from their job, and then not everyone is tempted to remain at home, inactive or to drown their sorrows in sandwiches with lots of mayonnaise when they are out of work either.

Nor does everyone who is out of work have resources to spend on depression therapy, whether they think they need it or not.

A bicycle might have been cheaper. It could help you get exercise as well as give you an excuse to get out of the house and into the world where you might find other opportunities.

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easy

When I was laid off I found that I saved $120 a week in commuting charges, $25 in weekly Starbucks costs, $35 in lunch money and probably some clothing money – over $200 a week easily. But that amount paled when compared to the money I spent on unneeded purchases in my visits to the mall (all on super-sale items), the money I’ll have to spend to take off the weight I put on puttering around the kitchen till noon every day, and the therapy sessions to help me through my depressions from being fat and unemployed.

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Simple Sapien

This article is very interesting. Staying above water financially is a tricky thing. Imagine applying this concept to the ones who are making minimum wage. It is ridiculous. Minimum wage is hard enough to live on even without all of the extra job costs.

I have been thinking about time worked whenever I spend money for the last few years. It helps me resist temptation when I know that I would have to spend a full work week to obtain the particular item. Thanks for the great article.

– Jack Rugile
Simple Sapien

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Rachel

Oh and don’t forget – if you don’t pay all your taxes like Joe the Plumber that saves you some money too!

Oh wait… he has to pay those still? 😉

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Snickers

That’s an interesting article. I having something similar to your article today on blog except that I was encouraing readers to come up with a number for what they are worth that might help them choose the right career.

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Jonathan E

I was thinking about this concept of real hourly wages last week, so this post was really interesting and relevant to me.

However, I had a funny thought in my head, and it had to do with productivity. See, as I’m writing this I’m at work, I’m not working. Can this time be considered part of my real wage? Basically, should we subtract those hours spent on youtube, NYtimes.com or sketching cars (I’m an industrial designer, but not in the auto industry) from the “hours spent on work-related tasks?”

Opportunity cost, or the foregone value of the next best alternative, may weigh heavily in career decisions, even if it’s not factored into the hourly wage calculation. (ex: if you invest money in stocks, the opportunity cost is the forgone interest that money would’ve earned in a bank account.)

If Joe’s plumbing job requires him to be available at odd hours for emergencies, taking away time he could spend with his family, that might make a higher hourly wage seem less attractive. Conversely, maybe Joe gave up a higher-paying desk job because he wants the reward of flexible hours and not being stressed out at the office. Just some food for thought for all of us.

Looking forward to seeing your follow-up post!

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takabanana

I agree – except subtracting the clothing and food part. You should only have to subtract the clothing wear/tear DIFFERENCE (versus not having a job), and same with food. Even if he stayed home, he’d still eat lunch. Sure, he will probably stay in and make his lunch, so the cost subtracted should be (McDonalds Cost – Homemade lunch cost). Same with the clothing – if he stayed home, he still has to wear clothes (or so we’d hope!). Even if he had to buy work-only clothes, that’s *less* wear-tear on his home clothing – so that “saves” money on the home clothing. The main thing is the extra cost difference of the work clothing over the home clothing, and whether or not his work causes faster/more wear/tear on the clothing. Otherwise, I totally agree with the concept/ideas here.

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Pat with SPI

I really hate thinking about money this way (a la this many hours of work bought me this). It makes me feel really bad when I purchase something rather significant, and I get a kind of sick feeling in my stomach.

When I first started working, I used to do this all the time. Now, I try not to think if money in this way.

Definitely not a new concept to me, something I’ve always considered when weighing the odds of this offer compared to that offer. I have done the best I feel I can to optimize the dollar amount/ hr that I make @ my job. I found one with a higher wage than most other offers, and @ the same time being closer to home. I do not take a lunch break, which helps to extra fuel costs as well as the costs associated with the temptation to go out and eat somewhere.

I definitely feel that money is time. It amazes me how one may often work an extra few hours a day or on a weekend to make a few extra $$ to afford the lawn service and cleaning lady.. when they could be doing this on their own and spending more time with their family..

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Elizabeth

Wow! I’ve been hearing so much about this Joe the Plumber character lately!

🙂

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Tina

I’m actually three quarters of the way through the book, which I borrowed from the library of course. I really enjoyed the whole concept of real wage but after getting to the part about the thousands of ways you can save, I put the book down. I will finish reading it just to see what the author has to say, but I think I have a better understanding of nominal versus real than my peers since I’m currently attending college and majoring in economics. The concept isn’t so new but he puts it in a new perspective that allows everyday people to relate to the concept and apply it to their lives.

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Caleb Nelson

I think it’s important to evaluate your worth per hour beyond your employment. While your employment may be your only source of income, evaluating your worth beyond it can be an eye-opening experience. You simply take how much money you bring in in a week and divide that number by 168 (# of hours in a week). The result is the amount of money you make an hour throughout your life. With this evaluation, your mind can generate some new ways of making money outside of your job. I think that it important to realize that your job does not have to be your only or your largest source of income.

And don’t forget the thing that can potentially decrease your wage the most if you need it – daycare! Right now I work part-time, but once I factor in childcare for my infant son, I am only making around $9 an hour (before taxes). Since I am not the primary bread winner, I mainly work just to have a break during the week (10 hours when I don’t have someone drooling and spitting up on me!). Don’t get me wrong, I love my son more than anything, but the short time back at work has done wonders for my mood. So even though I make very little for my time (after you subtract taxes, gas, and other things), it’s worth it to me.

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Wayward

Amanda beat me to it, but while it’s important to consider all costs associated with your chosen work into a “real” hourly wage, it’s just as important to factor in those portions of the benfits package that contribute to overall compensation. The employer match on a 401(k), the employer contribution to an insurance premium, the employer’s contribution to state and federal programs, and any other perks you may be able to take advantage of.

I work for a book publisher/distributor and one of our perks is that we can take advantage of wholesaler discounts on any book title that the distrbutor handles. It’s hard to assign an exact value to that particular perk, and while I still take advantage of the public library for my personal reading, I enjoy having that option for gift-giving.

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Mostlyharmless

I lol’d at the Joe The Plumber reference.

But a great point JD. If I did not work, I wouldnt have needed the car. And if did not have the car, I do not need the insurance. Add gas to it and I would have been saving 600+ every month!! Thats more than 1/6th of my salary!!

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Curt

Consider using this calculation to start your own business.

If you are working long hours at your job, then maybe you can earn the same hourly wage working for yourself – while building value in your own business.

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TosaJen

This idea had a big impact on how DH and I have shaped our lives and our priorities (starting 12 years ago or so).

Based on this analysis, new cars, impressive houses, and cable TV fell far down our list of worthy expenditures. We think long and hard about the value and payback we need to get from an item to be worth the life energy. Similarly, we don’t buy stuff for the kids based on their momentary “I wannas”, but based on what we think they’ll enjoy, use, and learn from long-term, as well as items they’ve shown interest in over time.

Back to the “real income”, I’ll be looking at that again soon, I’ll bet. I’m earning west coast wages in the midwest, 90% telecommuting, 50 hours/week, good benefits, stressful, flexible schedule. A lot of those factors will be changing, and I’ll have to spend a lot of thought on what changes to my time and stress is worth.

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leigh

so as a graduate student on a monthly stipend, i already only make something like $5/hour before i take out commute time and work related expenses… doesn’t that just make me feel valuable.

but being a mechanic on the flat rate system, especially with the economy down and business slow for over a year now, that’s a huge drain on your entire life. husband used to leave the house at 6am and not return until 9 or 10pm for not nearly enough money to justify those hours. most of it was standing around not getting paid to wait for work to come in. really glad that’s over, even if i see him less than ever for now.

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LiveWellSimply

Interesting. I’ve never put this idea into so many words, but I’ve always tried to avoid commuting because of the time=money equation. I’ll have to go do the math now and find my real hourly wage 🙂

Also, you should take into account 401(k) matching (if offered) and paid time-off (although I think the example included PTO since they based the 2500 annual hrs off 50 weeks instead of 52).

So, if Joe worked for a company with such benefits as 5% matching 401(k) and 2 weeks PTO a year:
401(k) $48k*5%=$2,400
PTO 2 weeks annually

($48k – $5k $2.4k) / (50 * (52 – 2)) = $18.16 per hr

@Rachel
As far as tax estimations, use the 2007 Tax Rate Schedules (Form 1040 Gen Instr. p87) and add 3% (for inflation). That should get you close.

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Tyler @ Dividend Money

Yes, I agree wtih the above that we must include those benefits that we would have to pay for ourselves.
It is a good exercise, but there are other intangibles to certain jobs – like career growth for example.
Taking a lower paying job with less associated costs might be great for the short-term, but if there is no long-term growth opportunities, you will find yourself further behind going forward.

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Rachel

I have been doing this using a million different variations lately!

I found out recently that I am being laid off from my job on the 1st off the year and there are so many different options to take into consideration….

Do I continue to work in the “big city” that is 50 miles from my house one way?

Do I not take a job till January and get the severance check, but risk being on unemployment for a while?

Do I trade in a long commute and high pay, for short commute low pay and possible bad hours?

All these questions have been plaguing us for the last 3 months, and probably the next 2 1/2 – but yeah, we have been using all the factors in our ‘pay’ not just the actual take home amount.

(Which, BTW, was also tricky to figure out actually how much your take home pay would be at each pay level with taxes and such!)

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Susy

Mr Chiot’s and I always try to calculate this when we’re bidding for jobs for our business. We also have to add wear & tear on the equipement, electric used at home, time driving, filming & editing, supplies. Plus you have to add in all the time you spend bidding jobs you don’t get, all the time e-mailing, etc. etc. I think this is why many businesses don’t succeed. They never stop to consider all the things that eat away at the bottom line!!!!

Certainly things like trying to change to a 4-day week, carpooling or taking the bus so you can work or read while you’re commuting, can all add a few extra $’s to that real hourly wage.

Amanda’s right about adding health care & retirement as well. I don’t make a big salary at my non-profit job, but I have great healtcare and I feel like I’m making a difference in the world (which is more imporant than extra cash for the accumulation of stuff I don’t need). Like Allison comments, sometimes enjoying your job is more important than extra cash in hand.

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Amanda

JD, just another thought…we did this in my simplicity group, but we made sure to include benefits such as health insurance or retirement that our work was also paying, because those are things that we’d have to pay for ourselves otherwise. This tends to make the real hourly wage inch up, even if only incrementally. Just a thought. 🙂

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Allison

JD, I just finished reading Your Money or Your Life (borrowed from the library, of course) and it really changed my thinking too. An important job-related expense for many people, is the money and time they spend to “unwind” or to reward themselves after a hard day’s work. If Joe’s plumbing job is so stressful that every night he comes home and spends 2 hours vegging in front of the TV with a beer, then he uses (loses!) an additional 10 hours a week, and whatever he pays for cable and beer. Or if Jill the plumber relaxes on weekends by hitting up the mall because hey, she works hard for her money and deserves some nice clothes, then she also loses time and money. In this sense, it may be perfectly reasonable to take a less stressful, lower paying job that doesn’t lead you splurge daily, if your real hourly wage ends up higher. I thought the book made a good point that if we all enjoyed our lives more, we wouldn’t need to escape, vacate or unwind.

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JerichoHill

JD,

An excellent discussion of just what composes our real wage. There’s an economist in you!

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Jan

(I know it’s a smidgeon off-topic, but it’s been on my mind for weeks)
I’ve been thinking about making a somewhat-related calculation about “bulk savings”.
The idea is that yes, I *can* save a lot of money on X pieces of Y, and I use, say 3X per year. However, at savings Z, does it make sense to buy 1X, 2X, 3X, etc. instead of paying down my debt? Where’s the sweet spot? 🙂

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